We'd like to remind Forumites to please avoid political debate on the Forum. This is to keep it a safe and useful space for MoneySaving discussions. Threads that are - or become - political in nature may be removed in line with the Forum’s rules. Thank you for your understanding.
Overpayment or Savings?
Comments
-
I've been following this with interest and spreadsheet at the ready!
Is there such a thing as a statutory formula for mortgage calculations (as there is for APR) or does each lender have their own version?0 -
I'm at the bounds of my understanding, but savings accounts quote an AER. This accounts for compounding.
On mortgages, it's best to speak to your lender and find out exactly how they're applying the interest. The key thing is whether they take the quoted figure and divide by 365 (daily interest) / 12 (monthly interest) or whether it's done properly to allow for compounding, ie 365th root of quoted rate is applied (daily) or 12th root (monthly). I get the impression the former approach is more common, but it really makes the quoted figure meaningless because e.g. if you had a £100k mortgage at 5.5% quoted in these terms and paid nothing, after a year you'd owe nearer £105650 than £105000 as you'd imagine. If they do use the "divide by 365" approach, I think the formula to get for a like-for-like comparison to AER would be (1+(i/365))^365)-1 where i is the interest rate expressed in decimal terms (5.5% = 0.055).
Interest being calculated daily and applied monthly does make a difference, but not much...e.g. on a balance of £100k you're talking about a couple of quid or so per month.
I thought mortgages do have APR figures applied against them, but they're equally useless as a comparator. They should in principle be like-for-like with AER, but the problems are (a) they're weighted with application fees - no use in this context and (b) where there's a fixed rate period involved, the APR allows for part of the loan at that rate, part at SVR - again no use in this context.
Point is though, all of this makes a difference of perhaps 0.2% when comparing with savings accounts....certainly not 2% as has been suggested.I really must stop loafing and get back to work...0 -
I have it on good authority there will be an article released VERY soon on this subject, and it will have a calculator with it. (I e-mailed THE expert to ask him:money: )Member of the first Mortgage Free in 3 challenge, no.19
Balance 19th April '07 = minus £27,640
Balance 1st November '09 = mortgage paid off with £1903 left over. Title deeds are now ours.0 -
Good because my brain has now turned to mush!Debt: 16/04/2007:TOTAL DEBT [strike]£92727.75[/strike] £49395.47:eek: :eek: :eek: £43332.28 repaid 100.77% of £43000 target.MFiT T2: Debt [STRIKE]£52856.59[/STRIKE] £6316.14 £46540.45 repaid 101.17% of £46000 target.2013 Target: completely clear my [STRIKE]£6316.14[/STRIKE] £0 mortgage debt. £6316.14 100% repaid.0
-
It can't be that mushy Kaz, you made a great point about people being made redundant-I hadn't thought of that-my DH & I work for the same company but decided when we took out this latest remortgage not to keep the payment protection insurance, as our mortgage is down to a manageable level-we think we are prety secure, but never say never...
I can't wait for the weekly e-mail now:rolleyes2Member of the first Mortgage Free in 3 challenge, no.19
Balance 19th April '07 = minus £27,640
Balance 1st November '09 = mortgage paid off with £1903 left over. Title deeds are now ours.0 -
http://www.moneysavingexpert.com/mortgages/mortgages-vs-savings#paying
at last, the definitive answer :j
now we can all make up our own minds:DMember of the first Mortgage Free in 3 challenge, no.19
Balance 19th April '07 = minus £27,640
Balance 1st November '09 = mortgage paid off with £1903 left over. Title deeds are now ours.0 -
Which I believe is as we said - compare the savings rate directly with your mortgage rate is the thing to do. I think the point that you had to use the savings rate net of tax was made a number of times...hence if you plug the figures into Martin's guide, 5.5% mortgage rate is the equivalent to 6.9% gross savings rate for a basic rate tax payer....you pay 20% tax on your savings, so get 80% of the interest, 80% of 6.9% is 5.5%. Of course, for an ISA, gross = net.
Important thing is it highlights that (particularly for higher rate taxpayers) not using spare funds to overpay your mortgage is madness.
Now, one I can't get my head quite around is that if you had the chance of an ISA at exactly the same rate as your mortgage, does the fact that you've got a limited ISA allowance give it extra value in that you don't want to waste your allowance? I think not, but I'm not sure...I really must stop loafing and get back to work...0 -
From the expert on my theory.:o
"Nope it doesn't work - as the interest compounding in the cash ISA overcomes the lack of compounding at a lower rate in the mortgage"
Apologies to anyone who,like me,thought they were onto an even bigger winner- it did seem to make sense, shows a little knowledge can be a dangerous thing.:rolleyes: Would have been grand if it did work though:DMember of the first Mortgage Free in 3 challenge, no.19
Balance 19th April '07 = minus £27,640
Balance 1st November '09 = mortgage paid off with £1903 left over. Title deeds are now ours.0 -
bunking_off wrote: »Now, one I can't get my head quite around is that if you had the chance of an ISA at exactly the same rate as your mortgage, does the fact that you've got a limited ISA allowance give it extra value in that you don't want to waste your allowance? I think not, but I'm not sure...
According to the new article you should always use you Cash ISA allowance first.Martin's_article wrote:Cash ISAs break the rule
Every year, each UK adult is allowed to save up to £3,000 in a cash ISA, which is effectively a tax-free savings account. The fact the interest isn’t taxed means the gain from this usually outweighs or equals the cost of mortgage debt. Add to that the fact that if you don’t use your ISA allowance each tax year, you lose it, it’s worth filling each year’s ISA up before repaying the mortgage. Though do ensure you’ve got the top cash ISA or it skews the maths.Member of the first Mortgage Free in 3 challenge, no.19
Balance 19th April '07 = minus £27,640
Balance 1st November '09 = mortgage paid off with £1903 left over. Title deeds are now ours.0 -
You see, that bit is where I need convincing.
Let's take the hypothetical situation where you only have £3k outstanding on your mortgage (wouldn't that be nice!). To make things easy, let's continue with the 5.5% interest rate, so let's imagine you get a £3k bonus from work, and have the choice of whether to put it in a 5.5% ISA, or pay your 5.5% mortgage (for simplicity let's say it's a interest-only mortgage).
Approach 1 : put money in ISA. You get 5.5% return on your investment, but are paying 5.5% on your mortgage so it cancels out. The theoretical benefit of the ISA is that next year (indeed ad infinitum) your ISA continues to accrue interest tax free.
Approach 2 : pay mortgage. You pay off your mortgage. Your ISA allowance for the year is "wasted", gone. In a year's time, you'll have effectively got a 5.5% return on your investment, because you won't have had to pay the interest charges on the mortgage. This is set against you're forgoing the 5.5% interest on your ISA that you didn't take out. However, you'll still effectively continue to get 5.5% return on your mortgage even after it's paid out, because at any point in time you'll owe £3k less on your mortgage than you would otherwise. E.g. in year 2 if you had £500 to spare so can put it in savings, your net balance would be £500 savings - £0 mortgage = £500 in credit. Compare with approach 1 having the same spare £500 you'd have £3500 savings - £3000 mortgage = £500 in credit. The two approaches seen equivalent to me. I'm obviously missing something but I don't know what.I really must stop loafing and get back to work...0
This discussion has been closed.
Confirm your email address to Create Threads and Reply

Categories
- All Categories
- 348.2K Banking & Borrowing
- 252.1K Reduce Debt & Boost Income
- 452.3K Spending & Discounts
- 240.7K Work, Benefits & Business
- 617K Mortgages, Homes & Bills
- 175.6K Life & Family
- 253.9K Travel & Transport
- 1.5M Hobbies & Leisure
- 16K Discuss & Feedback
- 15.1K Coronavirus Support Boards